What are you doing to compete?
March 7, 2006
All manufacturers have to realize that what is going on in China will affect them in some way, no matter how small their business is. Protectionist policies from the U.S. government aren't on the horizon to help. Business owners and managers are negligent if they do not make an effort to understand the economic changes caused by China's movement to a market economy in some detail and then use that understanding to evaluate and likely modify their companies' business plans.
Editor's Note: This article is adapted from William Barron's presentation, "China's growing economic influence—How are you reacting?" presented at the 3rd annual STAMPING Journal® Forum, May 10-11, 2005, Troy, Ohio.
Anyone who reads the newspapers knows that manufacturing employment in the U.S. has been declining for many years. Bringing this issue closer to home is the fact that more than 350 small and midsized U.S. metal stamping companies—17 percent of the market—disappeared between 1997 and 2002. The reasons are numerous: a cyclical downturn in the economy, automation, lean manufacturing techniques, and the movement of businesses offshore, primarily to China, in recent years.
All manufacturers have to realize that what is going on in China will affect them in some way, no matter how small their business is. Protectionist policies from the U.S. government aren't on the horizon to help. Business owners and managers are negligent if they do not make an effort to understand in some detail the economic changes caused by China's movement to a market economy and then use that understanding to evaluate and likely modify their companies' business plans.
China's changing economy is a threat, but it also is an opportunity. The threat comes from:
The opportunity for U.S. businesses comes from China having:
Even Western companies that don't have the product types or resources to take advantage of the opportunities in China need to react to the threat China presents. Studying what other small and midsized businesses have done is a good way to start developing ideas and plans.
Many companies have seen their competitors reduce prices dramatically by moving their manufacturing operations to China. One way for these companies to react is to automate their manufacturing processes in the U.S. Automated production always can compete in price with Chinese production.
For those companies that don't have the product volume to justify automation, subcontracting high-volume orders to Chinese companies is another option. Specials and short-run orders can continue to be made in the U.S. A company does not need to be large to try this option.
How does a company decide if subcontracting is a good choice? If a product line has become a commodity—that is, there is little differentiation in the market among competing products—and price is the main competitive driver, subcontracting is a suitable option. The company's resources can be better focused on new products and services that add value for the customer.
This subcontracting also can be approached by forming a joint venture with a Chinese manufacturer. However, many companies feel that they don't have the resources to devote to the development of a China joint venture. In those cases, the company can form a partnership or a consortium in the U.S., and the consortium can be the legal entity that partners with the Chinese manufacturer. This reduces the cost and risk for any one company.
For simple stamped parts with few finishing or secondary operations that require labor, China's low labor cost doesn't provide any advantage. There is an advantage in the cost of building the stamping tooling, however. Progressive-die cost in China is at least half of what it is in the U.S.
Many companies have lost business when their customers moved their entire manufacturing operation to China. Anyone selling to the computer, consumer electronics, clothing, or furniture industries experienced this years ago. Other industries, such as first-tier automotive suppliers, are in the process of moving some of their production there right now.
One stamping house that also designs and manufactures small assemblies of stamped parts had a primary customer base of automotive suppliers in the U.S., but these large customers were insisting that the stamping house open a facility in China to service their facilities that were already there and to ensure that this supplier was getting the best price.
The stamping house's solution was to form a joint venture in China with a Chinese stamping house to service automotive companies there and to export to the U.S. some products that required a significant amount of assembly labor. Single-piece stampings continue to be made in the U.S., as are short-run specials and prototypes. The company is beginning to source its tooling to China.
Another small stamping company in the Chicago area had a similar situation. The volume segment of its customer base moved to Asia. The company didn't have the financial or management resources to follow the business to Asia, even through subcontractors. Its solution was to change its business model to become a short-run specials and prototype shop only. It does not quote high-volume jobs because it knows it will lose the business to a Chinese supplier.
A California-based company also was too small to follow most of its customers to Asia. Its solution was to change to a business model of marketing only to markets that were staying in the U.S. For this company, this was primarily the military market, but it also targeted the medical and industrial machinery markets.
U.S. manufacturers' relationships with China don't always have to be in terms of importing, however. There are more opportunities to export to China than most people realize. Companies that make standard products based on well-known technologies can start exporting their products to China by selling through existing distribution networks, with little investment needed for sales and marketing. Some of the U.S. products that are in demand in China are construction products, capital equipment, raw materials, branded consumer products, and high-tech products.
The opportunities for companies to utilize China in their business can be summarized as follows:
• Make specials and prototype products in the U.S.; subcontract high-volume commodity products to China.
• Make specials and prototype products in the U.S.; establish a joint venture in China for high-volume commodity products.
• Source tooling from Chinese suppliers.
• Form a joint venture or consortium with other U.S. companies to own a Chinese facility jointly or to form a relationship with a Chinese subcontractor.
• Automate complete product line.
• Automate high-volume products; subcontract add-on product in China
• Establish a joint venture in China to manufacture and market to U.S. transplants.
• Change business model to fast turnaround specials, prototypes, and short-run production.
• Market only to market segments remaining in the U.S.
• Establish a manufacturing presence in China, wholly owned or with a Chinese investment partner.
• Initially market to U.S. transplants in China.
• Market full-scale to transplants and Chinese companies.
It is very important when evaluating different China-related strategies to base your analysis on cash accounting, not absorption accounting. In absorption accounting, fixed costs prorated over a smaller production volume will increase unit cost in the U.S., and those numbers can dissuade a company from moving some production to a subcontractor.
A decision against outsourcing could be disastrous to a company in the long run if it is not based on accurate, unskewed numbers. Fixed costs are already paid for. Analysis of alternatives should be based on projected out-of-pocket costs.
Once a subcontracting strategy has been selected, the hard work begins: the execution of that strategy. There are many lessons to be learned from doing business in China:
In a conversation, a great deal of weight is given to a person's age and position in addition to the logic of his or her statements. And decisions aren't made quickly. Someone once said that doing business in China is like playing chess with some of the pieces moved at night when nobody is around.
A few other important differences are:
In China everything is possible, but nothing is easy. However, what China is doing to the world's competitive environment can't be ignored by any U.S. company.
William Barron is principal with KDC & Associates Ltd., 522 S. Northwest Highway, Suite UL-8, Barrington, IL 60010, 847-776-7407, fax 847-776-2203, firstname.lastname@example.org, www.kdc-china-access.com.